Warnings for Investing in Constellation Brands Shares and a Positive Indicator to Monitor
In the rapidly evolving beverage industry, Constellation Brands, a leading importer of top-tier brands like Corona, Modelo, and Pacifico, is grappling with a series of challenges.
The company, which generates nearly all of its revenue from the U.S. market, has been hit hard by the high tariffs imposed by the Trump administration on overseas aluminum. This has affected the sales of canned imported beers in America, with Constellation's Mexican-brewed beer facing a 25% tariff on both aluminum cans and glass bottles. As a result, Constellation expects its comparable EPS to decline 6% to 9% for the full year.
The company's organic sales are expected to stay nearly flat in fiscal 2026, which ends next February. This stagnation can be attributed to the decline in alcohol consumption among younger Americans, with the percentage dropping from 72% to 59% over the past two decades. Furthermore, CEO Bill Newlands has warned that some of its Hispanic consumers, who account for roughly half of its beer sales, are reducing their discretionary spending due to immigration issues and the impact of Trump's tariffs.
In an effort to navigate these challenges, Constellation has been divesting its weaker wine and spirits portfolio. Last December, it divested its mid-tier Svedka Vodka brand to prioritize the growth of its premium spirits. The company is also trying to offset pressure from declining alcohol sales by selling products like hard seltzers and non-alcoholic versions of its flagship beers.
Despite these efforts, Constellation's stock has fallen about 30% over the past year, largely due to concerns over slowing growth in its core beer business, rising costs, and mixed results in its cannabis investment. The S&P 500, on the other hand, rose 17% driven by broader market gains.
It's important to note that Constellation's business isn't collapsing, but it's facing near-term headwinds and might not be a recommended investment until it overcomes its pressing issues. The company's divestments support its broader "premiumization" strategy to attract more affluent customers and generate higher-margin revenues.
However, there is uncertainty about whether sales of Gen Z-oriented products can offset Constellation's slowing sales of traditional beers, wines, and spirits. Approximately 45% of Gen Z consumers over the age of 21 didn't consume any alcoholic drinks at all, according to a NielsenIQ survey from 2024.
Despite these challenges, Constellation's beer segment is growing much faster than its smaller wine and spirits segments. The company imports approximately 39% of its beer shipments from Mexico, putting pressure on its margins, but this also indicates a strong reliance on its popular Mexican brands.
In conclusion, Constellation Brands is navigating a complex landscape of tariffs, changing consumer preferences, and internal restructuring. While the road ahead may be challenging, the company's focus on premiumization and diversification offers a glimmer of hope for its future growth. However, investors are advised to exercise caution and monitor the company's progress closely before considering an investment.
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